President Hollande's popularity has plunged in the past year and risking an end to France's culture policy could be political suicide. Photograph: Gonzalo Fuentes/Reuters

Paris is threatening to block an agreement on the European Union's terms for a free-trade pact with the US, worried that Hollywood blockbusters combined with Silicon Valley internet servers will wipe out the French film and music industries in the digital age.

EU trade ministers are to meet in Luxembourg on Friday to try and hammer out a mandate for the ambitious but highly complex free-trade negotiations which Barack Obama is keen to launch.

But under colossal pressure at home to protect the domestic arts industries from a transatlantic flood, President François Hollande is expected to block agreement on the EU mandate unless France's "exception culturelle" is observed and the audio-visual sector is removed from the scope of the negotiations.

The likely French veto could cause the negotiations, which have taken years to get to even the starting point, to collapse before they have begun. David Cameron may also be a principal casualty of a French refusal.

Chairing the G8 summit in Northern Ireland next week, the prime minister had hoped to announce the launch of the free-trade talks as a climax to the event.

"The British are so desperate to announce the trade breakthrough," said a senior EU official. "But if there is no deal with the trade ministers, there will be no party time in Lough Earne."

France has for decades practised a policy of subsidising the arts and using quotas to guarantee the survival of domestic television and film production against overwhelming Anglophone domination, setting quotas for broadcasting and levying cinema tickets to fund domestic film production to the tune of around €1bn (£850m) a year.

Dozens of French and other European film directors and actors have been lobbying strongly at the European commission to take the arts out of the remit of the negotiations. Britain has been the strongest advocate of leaving the sector in, on the grounds that it is a mistake to start dictating conditions and exempting areas before the negotiations even start. The US side makes the same point about so-called carve-outs.

But the nature of the dispute has been radically altered by the migration of audio-visual entertainment to the internet and its supply by servers that are overwhelmingly based in the US, and American providers from Apple's itunes to Android, and smartphone apps.

"The Americans are in pole position because they have all the service providers," said an EC official involved in preparing for the negotiations. "If you carve out things from the mandate, the Americans will do the same. On geographical indicator rules, for example. Then we'll have Californian champagne and Michigan camembert."

The ministers will examine a compromise formula on Friday from the commission, leaving everything intact in the negotiating mandate but specifying three "red lines" which could not be changed during the trade talks, essentially meaning that nothing would change in the French regime. Nonetheless, there is little sign of Paris being willing to back down.

"The way the French see it, it's a symbol. Always has been. Now why would Hollande be the first French president to give up l'exception culturelle. It's a symbolic fight," said the senior official.

The European parliament strongly supports the French position and until a few weeks ago there were 16 of the 27 EU governments on the French line. But as compromises have been forged, support for the French has collapsed to only Belgium and Hungary just days before Obama arrives in Europe for the G8 and to go to Berlin.

Germany initially supported France but has shifted. As Europe's biggest exporter by far, Germany has most to gain from as comprehensive a trade deal as possible.

Karel de Gucht of Belgium, the EU trade commissisoner who will head the negotiations with the Americans, has refused to toe the French line, although his staff insist that he supports preserving the French exception.

The aim of the talks is to boost transatlantic commerce by 10s of billions, according to supporters, and to set new rules and regulations for trade that would effectively become the global template since between them the US and the EU conduct more than half of global trade. China, say officials in Brussels, would effectively be obliged to adopt the same rules.